Did/Do You Know
What’s in your ETF
In our Did You Know? blogs we provide readers with useful information that is generally not widely realized by inexperienced investors. In this edition we will dive deeper into popular investment instruments known as Exchange Traded Funds (ETFs), discussed in Chapter 1 of our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon). In the publication we discuss types of ETF’s (both bullish and bearish), fees, Net Asset Values, and uses for investment and trading.
Today we would like to focus on the contents of an ETF. Since these funds are considered a “basket” of stocks, they can consist of any number of holdings. Most ETFs contain at least a couple of dozen stocks, often in the same sector or industry. Pay close attention to the name of the ETF, as some industries have sub-sectors. Familiarizing yourself with ALL the holdings is suggested, as it may hold some equities that are already in your portfolio as separate entities. You may not wish to “double-up” on certain stocks, especially if they are volatile.
Also, all stocks are not created equal in an ETF. There are “weightings” assigned to each holding, which is essentially the percentage of the total fund that any specific stock represents. For instance, an ETF consisting of 20 stocks is not necessarily, or usually, divided evenly into 5% per holding (equaling 100%). Normally, there are a few heavier “weighted” stocks, followed by many lighter-held positions. Though the exact percentage may not affect the decision to invest, it is wise to know what “drives” the fund. This knowledge is also helpful during “earnings season” as the higher weighted stocks may affect a move in price more than their less-weighted counterparts.
One easy avenue to access this information is the website BarChart.com. Under the ETF tab, start with Price Overview (top left), which will provide important information regarding the Fund Family, amount of Assets under management, the P/E ratio, and any dividend. Next scroll down to the bottom left and click Constituents, which will provide the list of holdings, beginning with the most heavily weighted. Each holding can also be researched by clicking on the ticket symbol to the left. Remember that those with the highest weighting will move the stock price more than those with the lowest.
For example, a popular Exchange Traded Fund is the S&P 500 Financials Sector SPDR (ticker symbol XLF). This ETF consists of 78 holdings, led by Berkshire Hathaway (BRK.B), at 11.64% weighting of the fund, and JP Morgan Chase (JPM) at 10.97%. The fund also holds several major banks (Wells Fargo, Bank of America, Citigroup, etc.), as well as popular credit card companies (Visa, Mastercard, American Express, etc.), all near the top of its weighting. It also holds some insurance companies, which are much lighter in weighting.
As we have also discussed in our publication, owning an ETF reduces the risk of surprise from one company’s news item or earnings announcement, and can be considered more conservative, or “safer,” depending on the investor/trader’s risk tolerance and strategies. The flip side is that the gains are usually less, as they are averaged out between numerous holdings – but gains are gains! Keep in mind that funds do swap holdings in and out, usually on a quarterly basis, so periodically check for any pertinent changes. Also consider the management/maintenance fees when choosing to invest in an ETF.
Whenever contemplating large purchases or investments, speak with an experienced individual, do your own due diligence, and question everything the “seller” or “salesperson” pitches. Unassuming or trusting buyers often get taken advantage of, and can easily lose their hard-earned capital.
*** This information is not intended to be financial advice, and should be considered or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.
